Funding Export Growth

Bond Options

Should your buyer require a contract bond for financial assurance, you may need to provide an advance payment bond or performance bond. An advance payment bond protects a buyer who advances funds to enable you to start work on a contract. If the contract terms are not met, the bond guarantees the return of the buyer’s original investment. A performance bond ensures that if you are unable to deliver goods in time or to an agreed standard, the bond may be forfeited to the buyer.

For example, the United States typically requires suppliers to post bonds of up to 100 percent of the contract value. US surety bond issuers are often unfamiliar with our exporters or financial institutions. But SMEs often don’t have the security to obtain enough capital; and the regulatory processes are complex. One solution may be EFIC’s bonding line facility. EFIC, Australia’s export credit agency, may be able to issue a bond through its US partner Liberty Mutual Surety with as little as five percent tangible security in the case of advance payment and performance bonds.

Most banks will issue bonds if you provide 100 percent cash cover, although a strong relationship with your bank may allow a lower level of security.

If you’re operating in emerging markets you may require political risk insurance. This protects you against financial losses arising from specified political events such as expropriation of assets by the host government, currency inconvertibility and transfer blockage, and war damage.

Currency Fluctuations

When trading with international markets you may be exposed to foreign exchange. It’s important to understand that currency values may change significantly from the time you agree a price to when the goods are produced. If your export is fixed in Australian dollars and our dollar appreciates, the buyer may want to go somewhere else where the currency is depreciating. Your ability to win business may be influenced by the currency in which you trade, so you should consider possible fluctuations. You may need to speak to your bank about hedging.

The currency you select may depend on the strength of your product. You may be able to insist on being paid in Australian dollars, which avoids hedging risk. On the other hand, if you’re competing against a global market or the buyer is calling the shots, they may insist on another currency, and if the exchange rate changes this could erode your margin. Currencies may be freely floated, pegged against a basket of currencies or government controlled. You may wish to avoid trading terms that you can’t get hedging against.

Funding Receivables

A big difference between selling to the Australian market and export is the level of invoice discounting. Domestic sales are well funded, usually secured against real estate assets, and receivables financing may be 100 percent. But lenders funding exports have less comfort, particularly in emerging markets that may not be well understood. Funding for overseas receivables is often significantly lower (sometimes as low as 5 percent). You may be able to borrow more with short-term credit insurance.

For longer-term needs, you could seek assistance from organisations such as Austrade or EFIC that have specially made products that could help you. EFIC’s research showed that SMEs often missed out on export opportunities due to working capital shortages. To help exporters overcome this problem, EFIC developed EFIC Headway. This product provides security to a participating bank to enable it to lend additional funds to eligible exporters, which could boost your working capital by up to 20 percent.

For investments such as infrastructure overseas, you may also need to develop banking relationships at your export destination. If your local bank doesn’t have branches there, this could be considered together with your financing needs, as it may not be easy to open bank accounts in foreign countries.

With competition from rapidly globalising supply chains and high-growth emerging economies, SMEs no longer have the luxury of being able to depend on stable domestic growth. If you don’t grab an opportunity, another company will beat you to it. Efficient financial management will give you the competitive edge to succeed in increasingly competitive export markets.

* Sunil Aranha is head of SME Business Development at EFIC. Previously, he held senior business banking roles at Citibank and Colonial, and was CEO of small to medium-sized companies involved in the retail food and cinema sectors.

Disclaimer: This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive about the topics or products or to render financial, insurance or legal advice. No reader should act on the basis of any matter contained in this article without first obtaining appropriate advice.